Geopolitical threats forcing Canadians companies to beef up

Article content

Anyone who watched the recent 4 Nations Face-Off knows that Canadian hockey fans greeted the playing of the United States national anthem at the Bell Centre in Montreal with a loud chorus of boos, and vice versa for games played at the TD Garden in Boston.

Article content

Article content

Many Canadians may feel that politics and hockey don’t mix, but there’s no doubt anxiety is running high over President Donald Trump’s threats to impose hefty tariffs and annex Canada as the 51st state.

Article content

Geopolitics is the No. 1  risk facing businesses and the global economy today, according to recent surveys of business leaders by the World Economic Forum and McKinsey & Co. Geopolitics have always influenced business, but something has clearly shifted.

The world order is undergoing a major, rapid and sometimes unpredictable transformation; everything from the U.S. aggressively pursuing its nationalist economic policies that are often at odds with its most loyal and longtime allies, to armed battles, such as the Russian/Ukraine war and the Israeli/Palestine conflict, to economic warfare tactics like sanctions, tariffs and foreign investment restrictions.

Boards must be prepared to confront this new volatile geopolitical reality head on. Three governance areas that should be assessed are board competencies, risk management and stakeholder interest and engagement.

First, boards need insightful and objective sources of geopolitical intelligence. Nominating committees should assess whether the board has the knowledge and skill sets to navigate geopolitical events and how they may impact the business.

Article content

Article content

If additional bench strength is recommended, boards need to consider the pros and cons of adding directors with specific expertise versus engaging external advisers. Having expert directors is advantageous in that they are attuned to the issues and can provide more insightful views than generalist directors.

Conversely, bearing in mind that many boards already have artificial intelligence, climate and environment, social and governance experts (ESG), building out a board with a team of experts risks authority bias. Due to the natural inclination to defer to those directors with subject matter expertise, generalist directors may feel less inclined to contribute to board discussions involving geopolitics.

The middle-ground approach is to respond with a diverse, well-balanced generalist board and look to external consultants when an expert view on a particular geopolitical matter is required.

The second governance area warranting review is a company’s risk management process. As boards continue to monitor the impact of geopolitical trends and their impact on the business, they should ask whether geopolitical risk justifies different treatment in the company’s risk management process than other risk types.

Article content

Some companies may find that geopolitical risk should be managed the same as any other risk; others may conclude the process should be tailored for the company’s specific circumstances.

It is not enough to simply anticipate what geopolitical events might occur. Rather, it’s critical to understand the company’s strengths and vulnerabilities in relation to different risk scenarios.

The output from the risk-management process should provide foresight and intuition into corporate strategy and how companies can capitalize on value-creating opportunities. This could mean developing new markets, transferring production to new locations or sourcing raw materials or inputs from new suppliers.

In times of disruption, companies need to consider how their corporate governance framework addresses the interests of both internal and external stakeholders of the corporation.

Key to decision-making in this area is corporate purpose and how it interacts with geopolitical impact.

The long-standing debate over whether a company’s corporate governance framework should support a shareholders-first model or one that addresses key stakeholders’ interests, including those of shareholders, tends to intensify whenever there is an important or controversial governance issue at hand.

Article content

For example, this debate has been part of the discussion around the interest in and subsequent backlash against ESG as well as the climate crisis and the role companies should take in tackling the issue.

Proponents of the shareholder primacy model argue that Canadian companies will be stronger and more competitive on the global stage when they are managed solely for the financial benefit of shareholders — that is when earnings and shareholder returns are the driving forces.

Stakeholder capitalists take a broader view. From their perspective, economic value and sustainable businesses are created when companies address those societal issues that impact or are important to their business. Key to this model is considering the interests of and engaging with key stakeholders such as employees, suppliers, customers and regulators.

Canadian corporate law requires directors as fiduciaries to act in the best interest of the corporation. Importantly, and following the codification of the BCE Inc. versus 1976 Debentureholders decision by the Supreme Court of Canada, directors may consider stakeholders’ interests in fulfilling their duties, but they aren’t mandated to do so.

Article content

In these turbulent geopolitical times, boards that ignore stakeholders and their interests do so at their peril.  Moreover, the odds of successfully changing a business plan are higher if there is buy-in across the different levels of the organization and support from key external stakeholders.

There’s no indication that the geopolitical upheavals of the past several weeks and months will subside anytime soon. On the contrary, Canadian businesses should expect continued uncertainty and volatility in geopolitics. But this doesn’t mean boards should be complacent with their current governance practices.

Now is the time for Canadian businesses to strengthen their corporate governance practices to put them in a better position to respond to heightened geopolitical tensions. This will make Canadian businesses and, in turn, Canada more resilient, diversified and sustainable. If not, we risk lagging further behind in growth, productivity and prosperity.

Robert Balcom is a PhD candidate, Osgoode Hall Law School, lecturer at Ted Rogers School of Management and former general counsel of George Weston Ltd., Loblaw Cos. Ltd. and Wittington Investments Ltd.

Article content